ATLANTIC CITY’S FUTURE:
Leveraging Opportunities, Meeting
Challenges
Prepared for Jones Lang LaSalle
October 13, 2008
1201 New Road, Suite 308
Linwood, NJ 08221 USA
609.926.5100
www.spectrumgaming.com
Contents
Executive Summary......................................................................................................................... 3
Introduction .................................................................................................................................... 6
Atlantic City: haven for capital investment .................................................................................. 10
CRDA: Strength, Opportunity........................................................................................................ 15
Impact of new development on Atlantic City market .................................................................. 17
Linking hotel rooms, visitation ...................................................................................................... 20
Emulating Las Vegas I: withstanding competition ........................................................................ 22
Emulating Las Vegas II: growing non-gaming revenue ................................................................. 25
New investments spur non-gaming spending .............................................................................. 28
Atlantic City comparisons ............................................................................................................. 34
Visitation trends in Atlantic City ................................................................................................... 41
Building destinations: Citywide impact ........................................................................................ 47
Atlantic City: Improving Its Image ................................................................................................. 50
Conclusion ..................................................................................................................................... 53
About this report .......................................................................................................................... 54
Page 2 of 54
Executive Summary
Atlantic City’s future depends on its ability to attract new gaming properties to help
advance its evolution into a regional entertainment destination.
Our analysis demonstrates that:

New gaming projects will grow the gaming market and will generate significant
increases in non-gaming spending.

New hotel rooms are also critical to Atlantic City’s future development, as every
incremental occupied room night generates more than $1,000 in incremental
gaming revenue, and also spurs significant non-gaming spending.

For every $1 of capital investment in the casino industry, cumulative gross
gaming revenue grows by nearly $5.
Atlantic City has several strengths that position it as a haven for capital investment. They
include:




A low tax rate.
A concentration of gaming capital investment in one location, creating a critical
mass of attractions.
A stable regulatory and political environment at the state level.
An existing tourism infrastructure that ranges from beaches, Boardwalk and
marina to a Convention Center, a major events arena and a variety of state
agencies created to promote and enhance tourism and travel.
These assets create the opportunity for Atlantic City to expand its role as a regional
gaming and entertainment destination by reaching out to a broader, more affluent demographic
within the population-laden areas that are within reasonable driving distance.
Atlantic City, however, is vulnerable to defection by gamblers who have more convenient
places to play closer to home. The city also faces the continual threat of further external
competition (including live tables in neighboring jurisdictions) and harmful legislation, such as
that which would result in higher gaming taxes or in-state racetrack slots.
The principal opportunity for Atlantic City is to expand its role as the leading regional
gaming and entertainment destination by reaching out to a broader, more affluent demographic
within the population-laden areas that are within reasonable driving distance of Atlantic City by
building on the momentum of the Borgata and growing the non-gaming business.
In this regard, Atlantic City can learn from Las Vegas, which not only survived the onset
of Indian gaming in California, but thrived because it built entertainment destinations that have
multiple attractions that catered to multiple markets.
Page 3 of 54
We believe that that the addition of new gaming properties to this market will do more
than capitalize on the strengths. Such new properties would take advantage of the opportunities
by expanding the number of adults who visit Atlantic City, and minimize the weaknesses by
effectively replacing the visits that have been lost to emerging markets – namely by low-value,
convenience customers – with new visits – namely by higher-value, entertainment-oriented
customers – that could be even more profitable.
At the same time, the principal threats could be neutralized as well. For example, if the
Legislature believes that tax increases or in-state competition from racetracks would create
investment risks that could discourage new capital investment in Atlantic City, it reduces the
likelihood of such threats.
Atlantic City has attracted more than $10 billion in capital investment since gaming
began in 1978. This concentration of gaming capital in one location is not being duplicated in
any other state in the East, principally because other jurisdictions have gaming-tax rates that are
typically five to six times higher than Atlantic City’s. History plainly shows that incremental
capital investment in Atlantic City results in a consistent and proportionate increase in gross
gaming revenue.
Room nights are another element critical to Atlantic City’s growth; in fact, the growth in
room nights correlates almost perfectly with the market’s growth in gross gaming revenue. In
effect, hotel rooms are the core capital investment that helps ensure that New Jersey’s casino
industry remains competitive, and that encourages other forms of investment in non-gaming
attractions.
Several destination gaming resorts are currently being planned for Atlantic City, but only
one is actually being developed – and its completion is uncertain due to the absence of all
necessary financing. Such uncertainly, in our opinion, represents an opportunity for a wellcapitalized developer to build the city’s next major gaming resort.
From an investment perspective, Atlantic City is seen as a safe bet because of the stable
regulatory and political environment. The gaming tax has remained stable and there have been
no significantly harmful legislative actions. Through various governors and legislatures, gaming
has never been viewed as partisan. Regardless of which party controls the Legislature or the
governor’s office, the casino industry has been viewed as a valuable generator of tax revenue.
Atlantic City is evolving – and must continue to evolve – into an entertainment
destination in which gaming is one of several activities. Retail is proving to be an important
secondary driver of visitation to the market. By that, we suggest that most people still visit
Atlantic City to gamble, but the retail, dining and entertainment options that have been
developed are proving to be vital in improving the quality of the visitor experience and extending
the length of stay.
Only one new casino hotel has opened in Atlantic City since 1990, largely because
investors feared regional competition or else chose to partake in that competition instead.
Spectrum believes that any new casino would both expand the market and cannibalize some
existing revenues, based on a combination of experience and common sense. The 2003 opening
of Borgata Hotel Casino & Spa caused an immediate decline in gross gaming revenue at all
properties, but mostly from what was at the time the top tier of properties. In other words,
Borgata took share from the top of the market.
Page 4 of 54
There is a widening disparity between Borgata and its competitors in net revenue;
although all casinos experienced declining growth rates in the face of regional competition, the
top properties have managed to grow net revenue.
Research indicates that, at a 33 percent participation rate (the participation rate in both
the New York and Philadelphia Designated Market Areas), the Northeast/Mid-Atlantic market
still has approximately $3 billion in untapped annual gaming potential. This supports the point
that destination casinos are more likely to attract that untapped market, as they would have
significantly greater capital investment in amenities that would appeal to a broader demographic.
Atlantic City is often compared – usually unfavorably – to Las Vegas. The major Las
Vegas Strip casinos generate nearly 60 percent of their revenue from non-gaming sources such as
hotel rooms, entertainment venues, restaurants, spas, etc. Atlantic City casinos, on the other
hand, in 2007 realized only 15.4 percent of their revenue from non-gaming sources. While many
observers prefer to view this ratio as a rather damning of Atlantic City, we believe it illustrates
the upside of the market to attract non-gaming customers, who tend to travel farther, stay longer
and spend more.
Retail space on the Strip is now more than double the casino space on the Strip, and one
analyst estimates that retail space there will increase by another 26 percent by 2011. This analyst
also estimates that Las Vegas tourists spent $4.5 billion on retail last year, noting that more than 20
million people visited the Grand Canal Shoppes at The Venetian; on average these shoppers visited
5.3 stores and spent an average of $150 per trip.
It is unlikely Atlantic City will ever become a Las Vegas, but it can learn from its western
counterpart. The first lesson is that by evolving into an entertainment destination, Atlantic City
need not be vulnerable to convenience-gaming markets that crop up in its feeder markets. The
goal then would be to leverage a principal strength – a concentration of gaming capital in one
location with a low tax rate – to minimize a principal threat: external competition.
Page 5 of 54
Introduction
Spectrum Gaming Group (“Spectrum” or “we”) has been retained by Jones Lang LaSalle
to provide an analysis of the Atlantic City market that addresses two key questions:


What are the strengths, weaknesses, opportunities and threats that face the
Atlantic City market in coming years?
What impact would one or more additional casino destination resorts have on the
market?
Although this report has been commissioned to be included as part of an overall request
for proposals at Bader Field, Spectrum was asked to take a broad view, looking at the overall
role of capital investment – and, in particular, new casino developments – in Atlantic City. As a
result, this report largely focuses on marketwide analysis.
Spectrum professionals have been studying the Atlantic City market for more than three
decades – prior to the opening of the first casino hotel in 1978 – and have developed a
fundamental thesis that these two questions are irretrievably inter-connected. Indeed, our
analysis over the years leads to the conclusion that destination resorts would enhance the
strengths of this market, capitalize on opportunities, minimize weaknesses and potentially
neutralize some serious threats.
This report will detail a number of strengths, weaknesses, opportunities and threats. But it
is important to focus on the core elements. Atlantic City’s chief strengths are:




A low tax rate.
A concentration of gaming capital investment in one location, creating a critical
mass of attractions.
A stable regulatory and political environment at the state level.
An existing tourism infrastructure that ranges from beaches, Boardwalk and
marina to a Convention Center, a major events arena and a variety of state
agencies created to promote and enhance tourism and travel.
The primary weakness in the Atlantic City market is its vulnerability to defection by a
significant number of customers who have shown a willingness to shift visits and gaming dollars
to emerging jurisdictions that may be closer to home. This is the principal reason why Atlantic
City, at this writing, is in the midst of a second year of declining gaming revenue. A related
weakness is a lingering perception among adults who have not visited Atlantic City in some
time, or who have never visited, that it offers limited appeal or is seedy.
The threats facing Atlantic City are varied, ranging from expanded competition outside
New Jersey (including the likelihood of table games being in nearby states that presently offer
only slots), as well as the potential for tax increases and slots at racetracks within New Jersey.1
The principal opportunity for Atlantic City is to expand its role as a regional gaming and
entertainment destination by reaching out to a broader, more affluent demographic within the
population-laden areas that are within reasonable driving distance of Atlantic City. Of course,
1
The Atlantic City casinos recently signed a three-year agreement with race tracks in which casinos pay a $90
million annual fee in exchange for a commitment that tracks will not add slots. This does not eliminate this risk;
rather, it just postpones it for three years.
Page 6 of 54
this outreach is dependent on capital investment – creating the right mix of non-gaming
amenities and experiences to attract visitors who seek to do more than play slot machines.
We believe that that the addition of new gaming properties to this market will do more
than capitalize on the strengths. Such new properties would take advantage of the opportunities
by expanding the number of adults who visit Atlantic City, and minimize the weaknesses by
effectively replacing the visits that have been lost to emerging markets – namely by low-value,
convenience customers – with new visits – namely by higher-value, entertainment-oriented
customers – that could be even more profitable. At the same time, the principal threats could be
neutralized as well. For example, if the Legislature believes that tax increases or in-state
competition from racetracks would create investment risks that could discourage new capital
investment in Atlantic City, it reduces the likelihood of such threats.
Page 7 of 54
Atlantic City SWOT Analysis
We provide the following analysis of Atlantic City’s strengths, weaknesses, opportunities
and threats in a straightforward manner:
Strengths

Atlantic City casinos enjoy a relatively low tax rate of 8 percent on gross gaming
revenue, plus a 1.25 percent reinvestment obligation, most of which is recycled into
Atlantic City. Most commercial gaming jurisdictions in the region impose taxes that are
at least five times higher than New Jersey’s.

21 million adults located within 120 miles of Atlantic City.

Atlantic City operators – because of this tax advantage – have the ability to offer more
promotional dollars to their customers, the so-called “reinvestment” of promotional
expenses in the form of cash back, or complimentary rooms or meals.

Non-gaming spending per visitor is growing, demonstrating that Atlantic City can still
attract high-quality visitors.

Companies that have operations in both Atlantic City and in a neighboring market have
tax-induced incentives to direct their better customers toward Atlantic City, where their
dollars will generate more for the bottom line.

Atlantic City has developed a critical mass of gaming attractions in one location that no
state could duplicate (except Nevada).

An investor-perceived stable and consistent regulatory infrastructure.

Atlantic City is located on the Atlantic Ocean, allowing Boardwalk casinos to offer a
beach experience (which only one other gaming destination – Biloxi-Gulfport – can
offer) and the world-famous Boardwalk for shopping, dining and strolling.
Weaknesses

Limited acreage zoned for new operators to enter the market.

Coerced into agreeing to three-year, $90 million, casino-funded subsidy for New Jersey
horse racing purses and breeders, and continual threat of slots at in-state racetracks.

Having the only customer parking-fee requirement for any commercial casino location in
the United States.

Surrounding states expanding or creating new convenience based gaming outlets in major
feeder markets.

Seasonality.

Poor image of city by many actual and prospective visitors.

Casino-floor smoking restrictions.
Page 8 of 54

Two consecutive years of GGR declines.
Opportunities

Create and emphasize non-gaming, resort-oriented amenities such as spas, nightclubs,
entertainment venues, restaurants and shops. Atlantic City casinos in 2007 realized only
15.4 percent of their revenue from non-gaming sources, demonstrating the upside to
attract non-gaming customers, who tend to travel farther, stay longer and spend more.

Attract a more upscale visitor base as lower-value, convenience gamblers are lost to
regional competition. The success of high-end restaurants and shops has shown that the
market will respond to the right products.

Develop former Bader Field airport site into a regional destination resort.

Improve convention activity, both at the Atlantic City Convention Center and in casino
hotels.

Attract regular, major airline service at Atlantic City International Airport, which has the
aviation infrastructure to support considerable growth.

Potential growth of electronic table games may promote additional revenues at a much
lower labor cost margin than traditional tables.

Possible expansion of casino approved zones particularly in the West Atlantic City and
White Horse Pike areas.
Threats

With the State of New Jersey facing financial deficit, pressure may mount to raise
gaming taxes in Atlantic City – which legislators know has the nation’s second-lowest
commercial gaming tax rate.

A combination of regional competition and the total smoking ban and their negative
effect to revenue growth may lead to an under-financed casino revenue fund, which may
be a catalyst for gaming tax increases.

Approval of VLTs at any of New Jersey’s racetracks, particularly the Meadowlands.

Regional competition, including expansion of Philadelphia Park racino, spring 2009
opening of Sands Bethlehem; eventual opening of two downtown slot casinos in
Philadelphia; possible approval of slot machines in Maryland; and possible approval of
sports betting in Delaware.

Approval of table games in Pennsylvania, Delaware and New York and enactment of
sports wagering in Delaware.

Increased tolls on the roadway infrastructure serving Atlantic City.
Page 9 of 54
Atlantic City: haven for capital investment
Atlantic City casinos pay an 8 percent tax on gross gaming revenue, and are assessed an
additional 1.25 percent reinvestment obligation that is overseen by the Casino Reinvestment
Development Authority, a state agency. This is in sharp contrast to most other states, including
every other state in the eastern United States. As noted in more detail later, the effective tax rate
in most states is about six times greater than it is in Atlantic City.
Cumulative gross gaming revenue (in thousands)
This differential inures to the bottom line of casino operators, enhancing the return on
investment. This increased ROI is enhanced further by a concentration of capital within Atlantic
City. Since 1978, approximately $10 billion has been invested in Atlantic City.2 The following
shows the results of a regression analysis that define a clear relationship between capital
investment and gross gaming revenue:
Regression analysis: Capital investment, gaming revenue
$100,000
$90,000
$80,000
$70,000
y = 4.2718x
R² = 0.8985
$60,000
$50,000
$40,000
$30,000
$20,000
$10,000
$0
$0
$5,000
$10,000
$15,000
$20,000
Cumulative capital investment (in thousands)
This chart, with a correlation of .898, shows a very strong relationship. Note that this
encompasses 30 years of data, from the first casino opening through the end of 2007. The above
chart looks at 30 years of data, starting at the point when Atlantic City was a novelty and it had a
monopoly in the eastern United States. We then performed the same analysis, but only looking at
the past 10 years:
2
New Jersey Casino Control Commission
Page 10 of 54
Cumulative gross gaming revenue (in thousands)
$100,000
Regression analysis: Capital investment, gaming revenue
$90,000
y = 4.7735x
R² = 0.9346
$80,000
$70,000
$60,000
$50,000
$40,000
$30,000
$12,000
$13,000
$14,000
$15,000
$16,000
$17,000
$18,000
$19,000
$20,000
Cumulative capital investment (in thousands)
Here, the correlation gets stronger, but the formula remains almost identical, even though
Atlantic City is no longer dependent on a monopolistic business model. The model shows that,
for every dollar of capital investment, cumulative gross gaming revenue grows by $4.77.
The conclusion is clear: Changes in capital investment fuel changes in gaming revenue.
This concentration of gaming capital in one location is not being duplicated in any other state in
the East. The preferred model is to combine relatively high tax rates with geographic protection.
Geographic protection – even in states such as Connecticut, in which two Indian casinos,
Foxwoods and Mohegan Sun pay the relatively low tax rate of 25 percent of slot revenue, with
table games being tax-free – is commonly accepted. The benefit to casinos is that, in those states,
they gain regional protection. The advantage for Atlantic City is that it can evolve into a regional
gaming and entertainment hub.
The stable regulatory and political environment in New Jersey can be traced to a few
longstanding considerations. For one, gaming has never been viewed as partisan. Regardless of
which party controls the Legislature or the governor’s office, the casino industry has been
viewed as a valuable generator of tax revenue.
Additionally, and in part because of the fear of competition from other states, lawmakers
in New Jersey have taken steps in recent years to essentially “circle the wagons” to protect the
Atlantic City franchise. These steps include a broad assortment of legislative and regulatory
changes, starting in 1990, that have encompassed everything from removing limits on the
number of licenses that one operator can hold to expanding gaming hours and removing a variety
of roadblocks.3
3
“Years of Change: 1990-1994,” New Jersey Casino Control Commission
Page 11 of 54
The most telling sign of political and legislative relief is the legislation, known as the
Gormley-James bill, which encouraged non-gaming development through tax incentives. The
Gormley-James legislation4 created up to 11 “entertainment/retail districts” in Atlantic City.
Qualifying projects:

Are exempt from construction sales tax

Receive a rebate on sales taxes, up to $2.5 million per year for 20 years

Receive a rebate on incremental unique local entertainment taxes generated for 20
years
The incentives have encouraged several major expansion projects in Atlantic City. The
following table lists the approved projects under this program:
PROJECT
RETAIL
(sq. ft)
HOTEL
Rooms
PARKING
Spaces
COST
($millions)
Tropicana
179,000
500
2,400
$230
2,000
1/02
11/04
Caesars
415,000
0
3,000
$215
1,190
9/03
6/06
Resorts
168,000
1,159
1,500
$108
514
3/02
n/a*
A.C. Outlet Shops
670,000
0
1,600
$205
1,348
5/02
7/04
Borgata
179,000
800
1,400
$563
1,725
3/05
6/08
Harrah’s/Showboat
257,646
1,360
3,697
$688
1,088
5/02
5/08
Trump Plaza
504,000
4,612
9,850
$1,542
2,662
n/a
n/a*
Revel
TOTALS
JOBS START
(permanent)
Date
420,000
1,822
7,793
$2,300
5,457
2,792,646
10,253
31,240
$5,743
20,307
END
Date
11/07 10/10*
Source: New Jersey Casino Reinvestment Development Authority / * - Project not yet started
The legislation, by any reasonable measure, has been a success. The Quarter at the
Tropicana, the first project to take advantage of the subsidies, realized as much as $60 million in
subsidies as a result of its $285 million investment.5
The success of such legislation extends beyond its ability to attract capital investment by
reducing the risk in such investments. The non-gaming investment that was fueled by this
legislation has quietly but materially expanded the Atlantic City market.
Retail is proving to be an important secondary driver of visitation to the market. By that,
we suggest that most people still visit Atlantic City to gamble, but the retail, dining and
entertainment options that have been developed are proving to be vital in improving the quality
of the visitor experience and extending the length of stay.
The Atlantic City Outlets/The Walk, developed by the Cordish Companies, is 100 percent
leased and occupied in its first two phases, and the third phase is 100 percent committed. “There
aren’t any more outlets left. Tenant demand is overwhelming,” company Chairman David
Cordish said.6 Sales per square foot at The Walk are well over $500, Cordish said. Leatherware
4
The principal sponsors were former New Jersey state Senators Sharpe James, D-Essex, and William Gormley, RAtlantic.
5
Aztar Corp. 10-Q filings, April 2003
6
Gaming Industry Observer, March 24, 2008
Page 12 of 54
company Coach, which was doing “way north” of $1,000 per square foot, tripled its square
footage in phase two, and other tenants are likewise expanding their footprint, he said.
Atlantic City retail has grown, and continues to grow, more upscale, in essence
mimicking, although lagging, the trend in Las Vegas. The catalyst for this trend in Atlantic City
was the November 2004 opening of The Quarter at Tropicana. The 200,000-square-foot retail,
dining and entertainment complex (“RDE”) includes both mid-market and high-end retailers
such as Brooks Brothers and Swarovski. The Pier Shops at Caesars continued this trend,
attracting retailers such as Apple, Armani, Bebe, Louis Vuitton, Movado and Tiffany.
High-end casino retail has proven successful. Borgata in its first year reported retail
revenue of $1,400 per square foot. One RDE at an Atlantic City casino reported to us sales per
square foot of $890. The Pier at Caesars had revenue per square foot of approximately $550 in
2007.
In the recent Visitor Profile Study that Spectrum conducted for the Atlantic City
Convention & Visitors Authority, the shopping experience ranked 3.12 on a satisfaction scale of
1-5, while the dining and restaurant experience scored 3.89.7
The Borgata factor
The 2003 opening of Borgata, and its immediate and continued success, has prompted
several gaming developers to propose building upscale gaming destinations in Atlantic City.
Only one such project, however, is currently being developed – Revel – and even the scheduled
July 2010 completion of that project is uncertain due to the absence of about 75 percent of the
required financing.
Following are the known plans or proposals for new casino resorts in Atlantic City:





7
Barr-Bashaw: Former Caesars Entertainment CEO Wallace Barr and South Jersey
developer Curtis Bashaw have proposed building a $1 billion-plus boutique resort at
the former “Dunes site,” on the Boardwalk four blocks south of the Atlantic City
Hilton. The developers have been quiet about their plans and its status is not publicly
known.
MGM Mirage: The company has proposed building a $4.5 billion to $5 billion, 3,000room gaming resort on its wholly owned 72-acre parcel between Harrah’s and
Borgata. The company announced in summer 2008 that it was indefinitely suspending
scheduled development due to the credit crisis.
Penn National: The company has no specific project plans or a site, but has been very
vocal in its desire to develop either Bader Field and/or a site west of Borgata on
Absecon Boulevard/Route 30.
Pinnacle Entertainment: The company bought and demolished Sands Casino Hotel to
make room for a planned $2 billion, 2,000-plus-room resort on the Boardwalk. The
company has indefinitely suspended its plans due to the credit crisis.
Revel Entertainment: The company is actively building a $2 billion, 1,900- or 3,800roiom gaming resort on the Boardwalk next to Showboat. The project includes a
5,000-seat entertainment venue, 500,000 square feet of retail, a wedding chapel and
Atlantic City Visitor Profile Study, September 2008, Spectrum Gaming Group
Page 13 of 54
other non-gaming features. Revel and partner Morgan Stanley are “in discussions
with various partners” to provide the balance of the financing.8
That experienced gaming companies and investors have expressed a willingness to spend
more than $10 billion in Atlantic City represents, in our opinion, the market’s upside, the current
decline of gross gaming revenues notwithstanding. That only one of these projects is actually
being developed – and even its completion is uncertain – represents an opportunity for other
developers who can obtain the necessary land and financing to open the next major destination
resort in Atlantic City.
8
Donald Wittkowski, “Revel sees Atlantic City’s future, now just has to build it,” The Press of Atlantic City,
October 13, 2008, p. 1.
Page 14 of 54
CRDA: Strength, Opportunity
In 1984, the New Jersey Legislature created the Casino Reinvestment Development
Authority (“CRDA”) to help ensure that casinos would reinvest some of their revenue back in
Atlantic City, to effectively realize the paramount goal of the Casino Control Act: the
revitalization of Atlantic City. The CRDA oversees the investment of a 1.25 percent
reinvestment obligation of gross gaming revenue. This obligation is assessed on all gaming
revenue. Casinos have various options as to how that obligation is met, but the most popular —
and, in our view, most effective — option is the purchase of CRDA bonds.
These bonds pay an interest rate that is essentially two-thirds of the prevailing market
rate. In other words, casinos get a return on money, albeit a below-market return. In effect, that
difference between what casinos earn and what they could have earned in the market is a
subsidy.
Over the past two decades, this growing pool of funds has been used in various areas to
advance public policies. (Visit www.njcrda.com for more information about this agency). Each
casino is required to pay to the CRDA 1.25 percent of its annual gross gaming revenues for 50
years, and the CRDA invests this money in eligible projects in Atlantic City, South Jersey or
North Jersey, as shown in the following chart:
Each casino's required investments by years
1-3
4-5
6-10
11-15
16-20
21-25
26-30
31-35
36-50
Atlantic City
100%
90%
80%
50%
30%
20%
65%
25%
-
South Jersey
8%
12%
28%
43%
45%
25%
50%
North Jersey
2%
8%
22%
27%
35%
35%
50%
50%
According to CRDA, “The law requires each casino to invest all of its first three years of
required Atlantic City investments in housing and community development projects. In years 4
through 25, each casino is required to make half of its required Atlantic City investments in
housing and community development projects. In years 26-35, each casino is required to invest
all of its Atlantic City investment obligations in economic development projects.
Eligible projects include, but are not limited to, “pressing social and economic needs of
local residents,” which could include parks, supermarkets, community centers; redeveloping
blighted areas; public recreation and entertainment facilities to promote tourism; housing; and
transportation.
Project examples of CRDA funding include the Atlantic City Convention Center, Atlantic
City Inlet housing, the Atlantic City-Brigantine Connector (aka “the tunnel”), several casino
hotel towers, Renaissance Plaza retail center, Korean War Memorial, Passaic YMCA, New
Jersey Performing Arts Center, and Ellis Island.
The CRDA is widely recognized for the role it plays in Atlantic City, but its importance
is often unrecognized. Because its funding is tied to the health of the casino industry, and in turn,
Page 15 of 54
because it can play a vital role in developing Atlantic City, this state agency can essentially plan
its own future growth, and develop strategies that could accelerate that growth.
This concept is not new in government, and is not even unique to Atlantic City. The
Atlantic City Convention & Visitors Authority, for example, funds its nearly $10 million annual
marketing budget from a $2 tax on occupied room nights in Atlantic City casinos (non-casino
hotels pay $1). If it achieves success in marketing Atlantic City, this would spur increases in
occupancy, and ultimately the construction of more hotel rooms. This, in turn, would increase
revenues for the ACCVA.
While it is common practice to set such goals for agencies charged with marketing tourist
areas, the self-perpetuating funding cycle is less apparent – but no less effective – when it comes
to the CRDA. Consider, for example, that the CRDA is required to shift some investments from
Atlantic City to other counties throughout the state as contributing casinos mature. (See the table
above.) A new property being built devotes 100 percent of its resources to Atlantic City for its
first three years.
If a new property expands the overall market (which it clearly would, as we will illustrate
shortly), it will grow the revenue base and expand the CRDA’s overall contributions. If a new
property also cannibalizes some existing revenue from older properties (again, which it surely
would) it would also shift some CRDA dollars back to Atlantic City, which would be invested in
projects that would enhance the city’s appeal as a place to visit as well as reside. This would, in
turn, expand the revenue base and grow the CRDA’s overall contributions.
Page 16 of 54
Impact of new development on Atlantic City market
Spectrum believes that any new casino property in Atlantic City would both expand the
market and cannibalize some existing revenues based on a combination of experience and
common sense. When Borgata Hotel Casino & Spa opened in July 2003 as the first all-new
casino hotel in Atlantic City in 13 years, this is precisely what occurred. Borgata, with a $1.1
billion investment, had the following impact within 18 months of its opening:
2003*
(All dollars in thousands)
Borgata gaming revenue
$
Industry gaming revenue
Other casinos' gross gaming revenue
266,857
2004
$
636,541
138.5%
4,488,335
4,806,701
7.1%
$ 4,221,478
$ 4,170,160
-1.2%
*Borgata opened July 2003
This table is limited in scope, in that it shows Borgata’s six-month results for 2003 and
full-year results for 2004 (see our Tier chart on Page 35 for further analysis of Borgata’s impact).
The table is designed to demonstrate that, despite cannibalization, the overall market grew, and
continued to grow. By 2006, Atlantic City annual gross gaming revenues reached $5.2 billion,
and have since declined from that peak. The 2007 decline was due chiefly to the opening of four
slot casinos in eastern Pennsylvania and, to a lesser extent, to a city ordinance that restricted
smoking to 25 percent of the casinos’ gaming floors. The continued growth of gaming in
Pennsylvania continued to negatively impact Atlantic City in 2008, and the decline was
exacerbated in summer 2008 by the national economic decline that hurt every gaming market
across the country.
Still, the core thesis that new properties would grow the market remains valid. Revel
Entertainment is constructing a $2 billion casino hotel in Atlantic City that would clearly meet
the standards of a destination resort. Revel CEO Kevin DeSanctis made a presentation at the East
Coast Gaming Congress in Atlantic City that included the following analysis of the Northeast
market:
Atlantic City
Pennsylvania
Connecticut
Rhode Island
Delaware
West Virginia
New York
Total
No. of Facilities
Positions
Revenue
11
4
2
2
3
1
7
30
45,871
8,683
17,365
5,300
7,225
4,765
14,147
103,356
$ 4,920,677,425
$
768,466,197
$ 2,499,116,378
$
400,610,454
$
612,407,100
$
463,367,816
$ 1,045,103,506
$ 10,709,748,876
Revel then looked at the potential market in the region, using a 300-mile radius from its
site on the Boardwalk in Atlantic City:
Page 17 of 54
Gaming Demand (300-mile Radius)
Adult Population (est. 2011)
Average Participation (%)
Frequency (Visits per Year)
47,287,590
9
33
6.1
Total Annual Visits
Spend per Visit ($)
Gaming Market Potential ($)
95,189,919
$145
$13,802,538,207
This analysis would indicate that, at a 33 percent participation rate, the region has $3.1
billion in untapped annual gaming-revenue potential. This supports the point that destination
casinos are more likely to attract that untapped market, as they would have significantly greater
capital investment in amenities that would appeal to a broader demographic. Revel’s analysis is
based on the broad Northeast gaming market. If we narrow the focus to those regions that are
presently supplying the bulk of visits to Atlantic City, it would support the same notion: Atlantic
City’s current market is significantly underserved.
Spectrum, which developed a 3,000-person intercept survey for the ACCVA, analyzed
the ZIP Codes of the adults who participated. Based solely on that analysis – which offers a
relatively conservative basis for such estimates – it was clear that Atlantic City is already
reaching into areas where 23.5 million adults reside. (This is principally a two-hour drive area,
vs. the 300-mile Atlantic City radius noted above by Revel.) Spectrum noted the following in its
Visitor Profile Study, which emanated from that survey:
“For discussion here, consider the total 23.5 million adults in this region
relative to Atlantic City’s visitor profile. According to the South Jersey
Transportation Authority, 33.3 million visitor trips were made to the city last
year.10 Setting aside air travel, that total is 33.1 million. Given the survey median
eight trips annually, this suggests Atlantic City is drawing on a regular visitor
base of about 4.1 million people. That translates to penetration of the potential
adult market of about 17.6 percent.
“It is common in most gaming markets that frequency of visitation moves
inversely with the distance traveled. We consider the 17.6 percent to be a
conservative estimate, with a potential penetration rate of between 17 and 27
percent. Notwithstanding the resort’s already substantial visitation numbers, we
suggest that this range indicates significant growth potential yet to be realized,
given a continued and improving mix of offerings. We also point out that the
potential market can be tapped in various ways, including increasing the number
of adults who visit Atlantic City, as well as by increasing the frequency of their
visits. Both present opportunities in various segments, according to our study.
9
This Revel Entertainment participation-rate assumption is consistent with findings in the Harrah’s Survey 2006:
Profile of the American Casino Gambler, in which the participation rates for both the New York and Philadelphia
DMAs were 33 percent. We believe such penetration rates for Revel’s Northeast catchment would have increased
since 2006 due to the ensuing opening of casinos in eastern Pennsylvania and Yonkers, NY.
10
South Jersey Transportation Authority, Visit-Trips, Atlantic City, New Jersey, 2007 Annual Report, p. 1
Page 18 of 54
“While some of this potential visitor growth has instead been recently
attending new competing convenience gaming offerings elsewhere, the new
venues that have come on line have not had great impact on this feeder market
participation. This general level of gaming and related entertainment participation
remains substantially below its potential, given national population gaming
participation rates in the mid to upper twenties percent. Bear in mind, the new
convenience gaming locations in eastern Pennsylvania are garnering about only
half their business from traditional Atlantic City customers. The balance is all
new business.11”
That last point supports Revel’s thesis, and underscores the theory that the expansion of
gaming creates new gaming customers (as Las Vegas has demonstrated). Clearly, Atlantic City is
vulnerable to competition, in part because Atlantic City’s gaming industry was originally
developed on the business model that it had a monopoly on gaming in the region. That monopoly
has surely been eroding, and as a result, Atlantic City casinos need to expand beyond the core
customer base: those adults who are gaming-centric, for whom casinos are both a passion and an
important pastime. The key to that expansion lies in additional capital investment in the form of
new attractions.
11
Atlantic City Visitor Profile Study 2008, Spectrum Gaming Group, p. 54
Page 19 of 54
Linking hotel rooms, visitation
The chart below tracks data, starting in 1978 and continuing through the second quarter
of 2008, that examines the correlation between occupied casino hotel room nights and gross
gaming revenue.
Regression analysis: rooms to revenue
$6,000
Gross gaming revenue (in millions)
$5,000
$4,000
$3,000
$2,000
R² = 0.9816
$1,000
$-
-
1,000
2,000
3,000
4,000
5,000
6,000
Occupied room nights (in thousands)
We have routinely tracked this correlation for years, and room nights have long been a
reliable predictor of gaming revenue. For example, when we studied the same correlation five
years ago, we found an almost perfect correlation, with an R-square of .98. At that time, the
regression analysis determined that every occupied room night equates to $1,096 of gross
gaming revenue. Four years later, the R-square has remained high, while each occupied room
night now equates to $1,003 in incremental gaming revenue.
The correlation should not be interpreted to mean that hotel guests account for all the
growth in gaming revenue since 1978. Rather, the growth in hotel rooms helps justify other
investments, such as in restaurant, parking and gaming capacities — which allow for more
marketing efforts to bring in drive-in and bus customers.
In effect, hotel rooms are the core capital investment that helps ensure that New Jersey’s
casino industry remains competitive, and that encourages other forms of investment in nongaming attractions.
Another trend is at play as well, which explains why the correlation between room nights
and gaming revenue has become somewhat weaker over the years: As noted, Atlantic City is
evolving toward a destination that attracts a wider demographic, beyond the core, gaming-centric
customer base. This means that incremental visitors may be affluent, and would willingly spend
more discretionary income in multiple cash registers, but their gaming budgets might not be
Page 20 of 54
commensurate. Effectively, this would indicate that the Atlantic City casino industry is
advancing along the same continuum as the Las Vegas casino industry: toward a business model
that is less dependent on casino revenue.
Page 21 of 54
Emulating Las Vegas I: withstanding competition
The first lesson that can be gleaned from the Las Vegas experience is that, by evolving
into an entertainment destination, Atlantic City need not be vulnerable to convenience-gaming
markets that crop up in its feeder markets. Indeed, we believe that such competition was always
inevitable. The goal then would be to leverage a principal strength – a concentration of gaming
capital in one location with a low tax rate – to minimize a principal threat: external competition.
The example comes, again, from Las Vegas, which has long derived a significant source
of revenue from southern California. Starting in 2000, however, tribal casinos began opening in
California, creating what has since become a $7 billion within California.
The following chart looks solely at the first five years since slots were installed in
California:
Las Vegas Calif. visitation vs. growth of Calif. slots
est. California slots
50,000
54,000
7,000,000
6,000,000
45,000
40,883
5,000,000
40,000
4,000,000
30,000
25,196
est. no. of slots at
California casinos
20,000
3,000,000
19,137
2,000,000
10,000
1,000,000
-
0
1996
1997
1998
1999
2000
2001
2002
2003
2004
Ext. Las Vegas cars from southern Calif.
60,000
Source: Las Vegas Convention and Visitors Authority, California Office of Attorney General
This dramatic rise of a new industry had no discernible impact on visitation, largely
because the quality and breadth of experience and attractions in Las Vegas more than offset the
convenience of gambling in California. We then examined longer periods of time. The next chart
examines visitation over nearly three decades:
Page 22 of 54
25%
Year-to-year change in no.
of drive-in visitors to Las
Vegas from California
Year-to-year change in no.
of Las Vegas visitor trips
Growth of Las Vegas visits vs. drive-in visits from Calif.
20%
15%
Early
1980s
recession
10%
Dot-com
collapse
and 9/11
Early
1990s
recession
5%
0%
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
1981
1980
-5%
Source: Las Vegas Convention and Visitors Authority
The chart shows a largely consistent pattern, with certain dips in visitation that
correspond with national economic downturns.
Finally, we examine California’s role as a feeder market over the past 28 years:
33%
32%
31%
2006
2007
34%
2001
2005
33%
2000
31%
34%
1999
34%
33%
1998
30%
29%
32%
35%
1996
35%
1997
34%
39%
1993
1995
40%
1992
34%
41%
1991
40%
1994
41%
1988
1990
41%
40%
1987
44%
41%
45%
1984
1986
46%
1983
42%
47%
1982
1985
46%
45%
1981
50%
42%
Visitors from California, as pct. of total Las Vegas visitation
25%
20%
15%
10%
5%
2004
2003
2002
1989
1980
0%
Source: Las Vegas Convention and Visitors Authority
Page 23 of 54
While California’s role as a feeder market has declined somewhat, that can be more
attributable to overall growth in Las Vegas visitation than it could be to the existence of casinos
within California.
The lesson is: Build entertainment destinations that have multiple attractions and can
cater to multiple markets as the best defense against competitive threats.
Page 24 of 54
Emulating Las Vegas II: growing non-gaming revenue
Atlantic City will likely never become another Las Vegas, in the sense that it will become
a global vacation destination. One of Atlantic City’s core strengths is its proximity to major
population centers in the East, which supports the argument that its future lies as a regional
destination. That does not, however, preclude the possibility that Atlantic City could evolve into
a destination where non-gaming sales emerge as major revenue and profit centers. In that sense,
Atlantic City could advance into an East Coast version of Las Vegas.
If this advancement continues, our analysis suggests it would fuel even more retail and
other sales. Consider this trend in Las Vegas. Joel Simkins, an analyst with Macquarie Capital,
wrote earlier this year:12 “Between 1997 and 2007, average shopping by tourists (in Las Vegas)
increased 53 percent, to $115 per trip. We also estimate that the typical Strip shopping center
generated annual sales per square foot of approximately $1,245, or 2.0 to 2.5 times the national
average of major retail operators. During this timeframe, the amount of retail space on the Las Vegas
Strip grew by nearly 140 percent, to over 5.4 million square feet.”
To put that in perspective, retail space on the Strip is now more than double the casino
space on the Strip, and Simkins estimates that retail space there will increase by another 26
percent by 2011. “As casino operators have executed on building ‘better mousetraps,’ shopping
facilities that increasingly include more dining (restaurants and nightclubs) and entertainment
attractions (gondoliers, performing acts, etc.) serve as vital generators of foot traffic. In addition, we
believe the next generation of mega-resorts will need differentiated retail experiences in order to
drive visitation, particularly among more discerning consumers,” Simkins wrote.
Simkins estimates that Las Vegas tourists spent $4.5 billion on retail last year, noting that
more than 20 million people visited the Grand Canal Shoppes at The Venetian; on average these
shoppers visited 5.3 stores and spent an average of $150 per trip.
Atlantic City’s The Walk, along with the Fashion Show Mall and Town Square in Las Vegas,
is a hybrid retail center; that is, it appeals to both locals and gaming tourists with a combination of
unique and mass-market stores, along with hassle-free access and ample parking.
“Fashion Show primarily targets a customer audience of approximately 872,000 people
within a seven-mile radius (according to 2006 census estimates). While attracting locals is not going
to be a make or break scenario for future retail developments on the Strip, designing facilities that
have good ingress/egress will go a long way toward attracting and not alienating these customers,”
Simkins wrote.
Although retail sales are flat nationally, Simkins noted that 12 percent of Las Vegas visitors,
or 4.7 million people last year, are from other countries – a positive sign for gaming-related retail.
“Given the relatively attractive cost of visiting Las Vegas for many international travelers, we
believe these visitors could be an important source of demand for the current and next generation of
upscale retail on the Strip. Given the opportunity to stock up on luxury items, we believe these
visitors have an opportunity to spend significantly more on retail than the typical domestic tourist as
well,” Simkins said.
12
Gaming Industry Observer, vol. 13, no. 5, p. 1
Page 25 of 54
Non-gaming revenues have already evolved into a material slice of Atlantic City’s overall
revenue base, as indicated in the following table:13
New Jersey Casino Industry’s Non-Gaming Revenue and Rooms Occupied (Last 6 Years)
(Figures, excl. averages, in millions)
Rooms
Food & Beverage
Other
Total non-Gaming
Less: Promotional Allowances
Cash non-Gaming
Rooms Occupied
Rooms Available
Occupancy
Average per Room Occupied
Non-Gaming Rev. per Room Occupied
Cash non-Gaming Rev. per Room Occ.
2002
$320
$539
$128
$987
($598)
$389
2003
$364
$578
$138
$1,080
($657)
$422
2004
$433
$626
$160
$1,220
($732)
$487
2005
$474
$644
$184
$1,302
($782)
$519
2006
$496
$672
$194
$1,362
($846)
$516
2007
$505
$654
$208
$1,367
($810)
$558
3,997
4,227
94.60%
4,361
4,689
93.00%
4,716
5,203
90.60%
4,950
5,424
91.30%
4,991
5,444
91.68%
4,842
5,286
91.60%
$246.94
$97.23
$247.53
$96.86
$258.63
$103.36
$262.94
$104.91
$272.89
$103.39
$282.41
$115.22
Growth in non-gaming revenue is also demonstrated by our analysis of the most recently
available data from the New Jersey Casino Control Commission. The chart below divides
Atlantic City casinos into clusters, based on location. The Route 40/Exit 2 cluster (referring to
the closest exit off the Atlantic City Expressway) is the Atlantic City Hilton and Tropicana. The
Midtown cluster is Caesars, Bally and Trump Plaza. The Inlet cluster is Resorts, Showboat and
Trump Taj Mahal, while the Marina cluster is Trump Marina, Harrah’s and Borgata.
Spectrum gathers bus data from the South Jersey Transportation Authority and parking
data from the New Jersey Division of Taxation, and assigns 2.3 adults per vehicle to develop a
longstanding model as to the estimated number of visits.
$30
Atlantic City non-gaming revenue per visit
$25.04
$25
2nd quarter, 2006
$21.43 $21.95
2nd quarter, 2007
$20
$18.86 $18.89
2nd quarter, 2008
$17.98
$15
$13.10
$15.11
$13.80 $14.01
$12.32 $11.79
$10
$5
$0
Route 40/Exit 2 cluster
13
Midtown cluster
Inlet cluster
Marina cluster
New Jersey Casino Control Commission filings. Promotional allowances are net of cash promotional expenses
Page 26 of 54
The chart shows that, in most clusters, the non-gaming spend per visit has increased, and
in the Marina cluster – where much of the new capital investment in Atlantic City has been made
in recent years – the increase is most notable.
Still, this data shows only the amount spent in casino hotels and does not capture what is
spent overall on non-gaming throughout Atlantic City. To better understand that, we look at
Luxury Tax revenues.
Page 27 of 54
New investments spur non-gaming spending
The Luxury Tax is an effective barometer of non-gaming spending. The Luxury Tax,
which has been in existence for more than a half-century, is a state tax that is only imposed on
certain items sold within Atlantic City. It is imposed on various non-gaming items that are sold,
not issued as complimentaries. For example, it imposes a 3 percent tax on drinks sold for
consumption on premises, but is not imposed on meals. A 9 percent levy is imposed on cash
sales of hotel rooms (not on complimentaries), as well as on other items, such as apartments that
are leased out for less than eight weeks, for rolling chair rides on the Boardwalk and on concert
and show tickets that are sold (but not on complimentaries).
While it does not track all sources of non-gaming spending,14 it is an effective barometer
for two compelling reasons:
1. The tax rate, and the items it is imposed on, has not varied during this time period.
2. It tracks sales from non-gaming establishments, which cannot be effectively monitored
via New Jersey Casino Control Commission filings.
We have compiled data for more than a decade on Luxury Tax sales, and analyze it based
on rolling 12-month periods, rather than on individual months. We do so primarily for two
reasons:
1. To eliminate seasonality.
2. To eliminate wide swings in reported collections that occur on a monthly basis.
The latter point needs to be reinforced. Luxury Tax collections – which come from a
variety of large and small businesses – are not collected on a timely basis, making it impossible
to specifically determine if a specific monthly collection accurately reflects purchases made
during that month.
The first chart shows approximately 12 years of Luxury Tax collections. To ensure that
the data is viewed in an appropriate context, we contrast the revenue with the corresponding
estimated annualized visitation to Atlantic City,15 also in rolling 12-month periods.
14
The tax is not imposed, for example, on retail sales, or on meals. Such items are subject to the state Sales Tax,
with certain exemptions such as groceries and clothing items.
15
As shown in more detail later, we track bus data from the South Jersey Transportation Authority as well as
parking fees from the New Jersey Division of Taxation. We assume each car parked at a casino garage has 2.3 adult
passengers, a measure first developed by the Atlantic City Expressway Authority, a predecessor agency to the South
Jersey Transportation Authority.
Page 28 of 54
$40,000,000
Atlantic City Luxury Tax revenue vs. visitation
$35,000,000
$30,000,000
$25,000,000
$20,000,000
$15,000,000
Actual Luxury Tax revenue
Estimated annualized visitation
$10,000,000
$5,000,000
Jan-08
Jul-07
Jan-07
Jul-06
Jan-06
Jul-05
Jan-05
Jul-04
Jan-04
Jul-03
Jan-03
Jul-02
Jan-02
Jul-01
Jan-01
Jul-00
Jan-00
Jul-99
Jan-99
Jul-98
Jan-98
Jul-97
Jan-97
Jul-96
Jan-96
$-
rolling 12-month periods
Note that, while Luxury Tax revenues appear to have steadily increased, visitation has
been relatively flat.
We then measured the same data, but looked at the ratio of annualized Luxury Tax to
annualized visitation, thus getting a sample of tax paid per visitor trip:
Page 29 of 54
Atlantic City Luxury Tax revenue vs. Luxury Tax per visit
$35,000,000
$1.00
$0.90
$30,000,000
$25,000,000
$0.70
$0.60
$20,000,000
$0.50
$15,000,000
Actual Luxury Tax
Revenue
Luxury tax per visitor
trip
$10,000,000
$5,000,000
$0.40
Borgata
opens,
July 2003
$0.30
Luxury Tax per visitor trip
Annualized Luxury Tax revenue
$0.80
$0.20
$0.10
Jan-08
May-07
Sep-06
Jan-06
May-05
Sep-04
Jan-04
May-03
Sep-02
Jan-02
May-01
Sep-00
Jan-00
May-99
Sep-98
Jan-98
May-97
Sep-96
$Jan-96
$-
Rolling 12-month periods
Using this contextual relationship, we can see that:

Luxury Tax per visitor trip has generally increased in tandem with
the increase in Luxury Tax revenue.

The July 2003 opening of the Borgata Hotel Casino & Spa
provided a tangible and apparently permanent boost to non-gaming spending in
Atlantic City.
As to the first point, we note that – while both lines generally move in concert – one
notable exception has been the most recent 12-month periods in which Luxury Tax revenues
declined at a steeper rate than non-gaming spending (as measured by the Luxury Tax) per visitor
trip. This would naturally lead to the assumption that the most recent decline in annualized
visitation reflects a material drop in the core gaming-centric visitor base, i.e., those gaming
customers who would be less inclined to spend in non-gaming areas.
As to the latter point, it illustrates that the opening of a major casino hotel spurs a
material increase in non-gaming spending. Again, to view that assumption in the proper context,
the next two charts track a series of significant capital investments in the Atlantic City market
during this period. The first chart examines openings during the first six years of this period,
which effectively translates into the pre-Borgata timeframe:
Page 30 of 54
Actual Luxury Tax Revenues, 1996-2002, rolling 12-month periods
$20,000,000
Hilton adds 300
rooms, August
1997
$19,000,000
Trump
World's
Fair
closed,
October
1999
Tropicana
$18,000,000 500-room
expansion,
July 1996
Harrah's
adds 452
rooms,
May 2002
Atlantic City
Convention
Center opens,
May 1997
$17,000,000
Boardwalk Hall
renovation completed,
Oct. 2001
$16,000,000
$15,000,000
Caesars adds
620 rooms,
November 1999
$14,000,000
$13,000,000
Harrah's adds
416 rooms (June
1997) while
Bally's opens
Wild Wild West,
no rooms added
$12,000,000
Sandcastle
Stadium opens,
May 1998
$11,000,000
Dec-02
Sep-02
Jun-02
Mar-02
Dec-01
Jun-01
Sep-01
Mar-01
Sep-00
Dec-00
Jun-00
Dec-99
Mar-00
Sep-99
Jun-99
Mar-99
Dec-98
Jun-98
Sep-98
Mar-98
Sep-97
Dec-97
Jun-97
Dec-96
Mar-97
Sep-96
Jun-96
Mar-96
Dec-95
$10,000,000
The next chart tracks the following years:
Actual Luxury Tax Revenues, 2003-2008, rolling 12-month periods
$30,000,000
Opening of
House of
Blues, July
2005
400-room
Rendezvous
Tower opens at
Resorts, July
2004
$28,000,000
$26,000,000
800-room Water
Club opens at
Borgata
June 2008
47-story, 964room Waterfront
Tower ones at
Harrah's.
March 2008
$24,000,000
$22,000,000Opening of
Opening of
Borgata, July
2003
544-room
Showboat
$20,000,000tower, May
2003
$18,000,000
The Pier at
Caesars
opens, July
2006
Opening of
The
Quarter,
November
2004
$16,000,000
$14,000,000
Harrah's
opens first
phase of its
$550 million
expansion,
including
pool and
spa.
June 2007
Spice Road
retail
promenade
opens at
Trump Taj
Mahal, June
2007
First phase of
The Walk is
completed,
August 2005
$12,000,000
Apr-08
Jan-08
Oct-07
Jul-07
Apr-07
Jan-07
Oct-06
Jul-06
Apr-06
Jan-06
Oct-05
Jul-05
Apr-05
Jan-05
Oct-04
Jul-04
Apr-04
Jan-04
Oct-03
Jul-03
Apr-03
Jan-03
$10,000,000
The chart reinforces the point that the Borgata was the primary catalyst behind recent
growth in non-gaming spending, with other attractions supplementing its appeal. Interestingly,
the Luxury Tax analysis shows that – while a number of catalysts have been introduced in
Page 31 of 54
Atlantic City over the past decade – nothing moved the needle as much as Borgata, the only
major new property to open during that time.
To better understand the relationship between the various trends we have analyzed thus
far, we also developed a regression analysis that tracks the correlation between occupied room
nights and Luxury Tax revenue. Both measures are tracked on a rolling 12-month basis. We
calculated occupied room nights based on the $2 per night fee assessed on casino hotel rooms.
Luxury tax revenues (rolling 12-month periods)
Regression analysis: Impact of occupied room nights on
Luxury Tax (1995 - June 2008)
$33,000,000
$28,000,000
y = $4.26 x
R2 = 0.84
$23,000,000
$18,000,000
$13,000,000
$8,000,000
$3,000,000
3,300,000
3,800,000
4,300,000
4,800,000
5,300,000
5,800,000
No. of occupied room nights (annualized)
The analysis shows a strong correlation, as measured by the R-square of 0.84 – and
would indicate that each additional hotel room can be expected to generated an additional $4.26
in Luxury Tax. Again, this is not simply because adults who stay in such rooms will pay the tax.
Rather, it supports the argument that additional hotel rooms are often built alongside an
additional complement of other amenities, including dining, retail and entertainment offerings.
Atlantic City casinos in 2007 realized only 15.4 percent of their revenue from nongaming sources. While many observers prefer to view this ratio as rather damning of Atlantic
City, we believe it illustrates the upside of the market to attract non-gaming customers, who tend
to travel farther, stay longer and spend more.
The following chart examines the industry’s non-gaming revenue (net of promotional
allowances) annual growth by peer group, as grouped by annual gross operating profit. (Tier 1 =
Borgata; Tier 2 = Bally’s, Caesars and Harrah’s; Tier 3 = Showboat, Tropicana and Trump Taj
Mahal; Tier 4 – AC Hilton, Resorts, Trump Marina and Trump Plaza). Note that there is no trend
whatsoever. The spikes have coincided with the openings of hotel towers and retail centers.
Page 32 of 54
Casinos' growth in net non-gaming revenue
25%
20%
15%
10%
Tier 1
5%
Tier 2
Tier 3
0%
Tier 4
-5%
-10%
-15%
2000
2001
2002
2003
2004
2005
2006
2007
The chart below illustrates how much of each peer group’s net revenue is derived from
net non-gaming revenue. Note the chasm between Borgata and the other properties. The Tier 3
properties – Showboat, Tropicana and Trump Taj Mahal – have supplanted the higher-tiered
group in this category due to the growing emphasis on retail, live headline entertainment and
additional hotel capacity. We expect to see a lift in Tier 2 in 2008 results, with the opening this
year of the 960-room hotel and The Pool complex at Harrah’s Atlantic City and the growing
traction of The Pier Shops at Caesars.
Net non-gaming revenue as percent of net revenue
35%
30%
25%
Tier 1
20%
Tier 2
15%
Tier 3
Tier 4
10%
5%
0%
1999
2000
2001
2002
2003
2004
2005
2006
2007
Page 33 of 54
Atlantic City comparisons
To provide perspective regarding the performance of a new property in Atlantic City, we
have segmented the existing Atlantic City casino hotels into four peer groups (as seen above).
Segmenting the results illustrates how the larger properties compare to the smaller properties;
how the better-capitalized properties compare to the under-capitalized properties; how the major
gaming-industry operators compare to the secondary operators; and, perhaps most importantly
for this analysis, how the sole Tier 1 property – Borgata – compares to the rest of the market.
Analyzing the Atlantic City gaming industry in this manner provides a more valid comparison
tool than examining industry totals and averages, which can be skewed by underperforming
properties.
The Tier 1 breakout is especially relevant for this report, because it provides benchmarks
for any new casino hotel in Atlantic City – benchmarks not skewed by other properties in the
market. Borgata opened in July 2003, at which time it was the first new casino hotel to open in
the market since 1990. As such, Borgata was the first to incorporate elements from the presentday Las Vegas Strip – such as coinless gaming, emphasis on hotel-room quality and non-gaming
amenities, garage speed ramps, sex appeal in marketing – that have made it, by almost any
measure, the market leader in Atlantic City. Every new planned entrant in Atlantic City –
including MGM Mirage, Pinnacle Entertainment and Revel Entertainment – has positively
referenced Borgata in seeking to develop the next generation of casino hotels in Atlantic City.
Borgata’s results, as seen in the Tier 1 segments in the following charts, plainly
demonstrate the potential for any new entrant of similar scale to become a market leader in
Atlantic City.
Our peer segments are grouped according to 2007 gross operating profits, as reported to
the New Jersey Casino Control Commission. The peer segments are static through our nine-year
analysis period; that is, properties that may have been grouped into a different tier in previous
years are grouped based solely on 2007 year-end data.
The peer groups are segmented as follows:

Tier 1: Borgata

Tier 2: Bally’s, Caesars, Harrah’s

Tier 3: Showboat, Tropicana, Trump Taj Mahal

Tier 4: A.C. Hilton, Resorts, Trump Marina, Trump Plaza
Two casino hotels that no longer operate are excluded from the peer segments but are
included in industry totals where applicable. They are Claridge (which became a part of Bally’s
on January 1, 2003) and Sands (which closed November 10, 2006).
The following graphical analyses illustrate the differences between the peer groups. Note
that the sole Tier 1 property (Borgata) opened in July 2003; as such, any Borgata results shown
for 2003 are for the second half only and its growth rates are excluded for 2004.
Page 34 of 54
Gross gaming revenue growth
12%
10%
8%
6%
4%
Tier 1
2%
Tier 2
0%
Tier 3
-2%
Tier 4
-4%
-6%
-8%
2000
2001
2002
2003
2004
2005
2006
2007
The opening of Borgata in July 2003 caused an immediate decline in gross gaming
revenue at all properties (chart above), but mostly from what was at the time the top tier (Tier 2)
of properties. In other words, Borgata took market share from the top. The opening of the 544room hotel tower at Showboat in May 2003 mitigated the declines in the Tier 2 group. The
ability of Showboat to hold market share in the face of the Borgata opening demonstrated – then
and now – the importance of capital investment as a defensive (or offensive, depending on one’s
perspective) measure. All properties were negatively impacted by the rollout of eastern
Pennsylvania casinos in 2007 and, to a lesser extent, the city ordinance that restricted smoking to
25 percent of the casino floor. Note that the top two tiers did grow their revenues while the
bottom two tiers reported sharp declines.
Slot revenue growth
12%
10%
8%
6%
4%
Tier 1
2%
0%
Tier 2
-2%
Tier 3
-4%
Tier 4
-6%
-8%
-10%
-12%
2000
2001
2002
2003
2004
2005
2006
2007
Page 35 of 54
As the slot-win (previous) and table-win (following) charts illustrate, slot revenue was
disproportionately impacted by the rollout of eastern Pennsylvania casinos – because
Pennsylvania casinos offer only slot machines. Atlantic City continues to hold a competitive
advantage over neighboring jurisdictions, which cannot at this time operate live table games.
Table games revenue growth
20%
15%
10%
Tier 1
Tier 2
5%
Tier 3
0%
Tier 4
-5%
-10%
2000
2001
2002
2003
2004
2005
2006
2007
Table revenue as percent of gross gaming revenue
45%
40%
35%
30%
Tier 1
25%
Tier 2
20%
Tier 3
15%
Tier 4
10%
5%
0%
1999
2000
2001
2002
2003
2004
2005
2006
2007
Until Borgata opened in July 2003, slot machine revenue had taken an increasingly
bigger slice of the total Atlantic City gaming pie for the previous 22 years (chart above). Borgata
built its property to appeal to table-games players, both by emphasizing the table-games product
directly and by offering premium amenities for table games players, such as multiple gourmet
Page 36 of 54
restaurants, a high-end spa, luxury hotel rooms and suites, and top-flight entertainment.
Borgata’s success in this gaming segment immediately caused competitors to remove their
blinders and put more effort into rebuilding their table operations.
Average net revenue per property
$900,000
$800,000
$700,000
$600,000
Tier 1
$500,000
Tier 2
$400,000
Tier 3
$300,000
Tier 4
$200,000
$100,000
$0
1999
2000
2001
2002
2003
2004
2005
2006
2007
The charts above and below examine net revenue. Above, note the widening disparity
between Borgata and its competitors. Below, although all peer groups experienced declining
growth rates in the face of regional competition, the top tiers have managed to grow net revenue,
as similarly shown in the earlier chart illustrating growth in gross gaming revenue.
Net revenue growth
15%
10%
5%
Tier 1
Tier 2
0%
Tier 3
-5%
Tier 4
-10%
-15%
2000
2001
2002
2003
2004
2005
2006
2007
Page 37 of 54
Average gross operating profit per property
$300,000
$250,000
$200,000
Tier 1
Tier 2
$150,000
Tier 3
$100,000
Tier 4
$50,000
$0
1999
2000
2001
2002
2003
2004
2005
2006
2007
The charts above and below examine gross operating profit (“GOP”). Borgata reported
2007 GOP of $245 million, which was 44 percent better than the average Tier 2 property, 107
percent better than the average Tier 3 property and 607 percent better than the average Tier 4
property. As seen in the growth trends chart below, Borgata was not immune from the impacts of
regional competition and, to a lesser extent, the smoking restrictions.
Gross operating profit growth
25%
20%
15%
10%
5%
Tier 1
0%
Tier 2
Tier 3
-5%
Tier 4
-10%
-15%
-20%
-25%
2000
2001
2002
2003
2004
2005
2006
2007
Page 38 of 54
Gross operating profit margin
40%
35%
30%
25%
Tier 1
20%
Tier 2
Tier 3
15%
Tier 4
10%
5%
0%
1999
2000
2001
2002
2003
2004
2005
2006
2007
Gross operating profit margins (on net revenue) declined immediately after Borgata
opened, with Tier 4 properties experiencing significant – and lasting – deterioration (chart
above). Note that the Tier 2 properties – all operated by slot-centric Harrah’s Entertainment –
have maintained relatively stable GOP margins since the initial impact of Borgata. Borgata has
not maintained the highest GOP margins, due largely to its focus the labor-intensive table games
segment. Borgata’s chief visionary and former CEO Robert Boughner was fond of saying, “You
don’t take margin to the bank; you take profit.” And in the GOP category, Borgata has been the
clear leader since its first full year of operation.
One of the chief impacts to GOP is promotional spending. Atlantic City casinos are well
known – perhaps notorious – for such spending, sometimes termed “customer reinvestment.” For
2007, promotional spending equated to 33.1 percent of gross gaming revenue (up 582 basis
points since 2002). There are three principal causes of such a high rate:

New Jersey’s low gaming-tax rate (8 percent, second in the country only to
Nevada’s 6.75 percent), which permits such investment in their customers.

Atlantic City’s base of high-repeat players that has become dependent on a steady
diet of incentives.

The tight proximity of the casinos, which allows players to visit multiple
properties on one trip, prompting casinos to ramp up incentives to retain or steal
players.
The promotional spending takes two forms:

Allowances, which are the retail value of rooms, food, beverage, bus program
cash, in-house entertainment, and other complimentaries. This segment typically
accounts for about 88 percent of the total promotional spending category.
Page 39 of 54

Expenses, which are the casinos’ actual costs for travel, gifts and external
entertainment for preferred players.
The following two charts illustrate total promotional spending in dollars and as a
percentage of gross gaming revenue. Note that Borgata is, by far, the biggest promotional
spender among the tier groups (and $40 million more than Bally’s, the second-highest-spending
operator), but it is in line with its competition when evaluated as a percentage of gross gaming
revenue.
Average total promotional spend per property
$250,000
$200,000
Tier 1
$150,000
Tier 2
Tier 3
$100,000
Tier 4
$50,000
$0
1999
2000
2001
2002
2003
2004
2005
2006
2007
Total promotional spending as percentage of GGR
40%
35%
30%
25%
Tier 1
Tier 2
20%
Tier 3
15%
Tier 4
10%
5%
0%
1999
2000
2001
2002
2003
2004
2005
2006
2007
Page 40 of 54
Visitation trends in Atlantic City
This section of the report shows detailed visitation trends in Atlantic City in recent years.
Spectrum routinely tracks various measures of visitation data, and measures them in a number of
ways:

By type of visitor

By location visited

Over periods of time.
As seen in the previous section, we also cross-measure these numbers against various
other data, such as revenue and profits, to gain some insights into the quality of visitor, the
spending per visit and the length of stay.
We first look at long-term visitation trends as measured by the tolls collected at the
Pleasantville Toll Plaza, which is the closest toll to Atlantic City. Indeed, all east-bound traffic
through that toll must exit in Atlantic City.
2001
2002
2003
2004
2005
2006
January
1,707,387
1,937,993
1,948,775
1,912,756
1,827,175
February
1,689,029
1,969,819
1,710,465
2,008,456
March
1,905,696
2,171,512
2,164,954
2,026,672
April
1,922,309
2,058,979
2,074,527
May
2,018,674
2,232,071
2,260,437
June
2,030,908
2,334,737
July
2,286,862
2,527,093
August
2,206,208
September
October
2008
Average
2,015,719
2,018,444 2,182,682
1,943,866
1,894,555
1,932,387
1,891,935 2,208,859
1,913,188
2,080,965
2,215,707
2,207,560 2,452,991
2,153,257
2,056,619
2,111,822
2,187,467
2,141,844 2,303,316
2,107,110
2,250,030
2,239,191
2,315,949
2,307,647 2,509,967
2,266,746
2,296,337
2,268,694
2,248,950
2,351,451
2,378,374 2,484,229
2,299,210
2,588,064
2,584,076
2,618,367
2,534,737
2,595,586 2,726,043
2,557,604
2,556,632
2,634,026
2,559,652
2,511,614
2,608,799
2,558,347 2,863,128
2,562,301
1,962,000
2,182,509
2,143,972
2,257,909
2,109,960
2,266,751
2,236,052
2,165,593
1,914,461
2,101,481
2,174,069
2,027,974
2,091,127
2,141,169
2,168,434
2,088,388
November
1,823,758
1,998,934
2,000,494
1,907,578
2,001,640
2,049,855
2,087,411
1,981,381
December
1,655,416
1,974,025
2,000,000
1,953,963
1,980,519
2,048,693
2,018,437
1,947,293
23,122,708 26,045,785 25,996,120 25,814,379 25,715,885 26,668,684 26,610,071
25,710,519
Total
2007
Source: South Jersey Transportation Authority
Note that the data is for tolls both ways, which means that – by halving the average over
the past seven years – we can conclude that about 12.35 million vehicles arrive in Atlantic City
annually via the Atlantic City Expressway, which would be the preferred path for the
overwhelming majority of visitors.
This level of vehicle traffic comports with our other visitation methodologies, assuming
2.3 adults per car. The next table examines seasonality over the same period, looking at the
percentage of visits by month:
Page 41 of 54
Percentage of total Atlantic City automobile traffic, by month
2001
2002
2003
January
7.4%
7.4%
7.5%
February
7.3%
7.6%
6.6%
March
8.2%
8.3%
8.3%
April
8.3%
7.9%
8.0%
May
8.7%
8.6%
8.7%
June
8.8%
9.0%
8.8%
July
9.9%
9.7%
10.0%
August
9.5%
9.8%
10.1%
September
8.5%
8.4%
8.2%
October
8.3%
8.1%
8.4%
November
7.9%
7.7%
7.7%
December
7.2%
7.6%
7.7%
Source: South Jersey Transportation Authority
2004
7.4%
7.8%
7.9%
8.0%
8.7%
8.8%
10.0%
9.9%
8.7%
7.9%
7.4%
7.6%
2005
7.1%
7.4%
8.1%
8.2%
8.7%
8.7%
10.2%
9.8%
8.2%
8.1%
7.8%
7.7%
2006
7.6%
7.2%
8.3%
8.2%
8.7%
8.8%
9.5%
9.8%
8.5%
8.0%
7.7%
7.7%
2007
7.6%
7.1%
8.3%
8.0%
8.7%
8.9%
9.8%
9.6%
8.4%
8.1%
7.8%
7.6%
average
7.4%
7.3%
8.2%
8.1%
8.7%
8.8%
9.9%
9.8%
8.4%
8.1%
7.7%
7.6%
The yearly trends show very little deviation in the traffic patterns by month, and no
perceptible shift in seasonality.
Similarly, in the next series of charts, we looked at peak periods, as defined by the July
4 weekend. Note that there are no significant deviations in hourly patterns either, regardless of
economic conditions, weather or any other factor that could impact a casino destination.
th
The next series of charts is based on a series of snapshots, showing the number of
vehicles passing through the Pleasantville toll plaza during peak periods over a span of six years.
We selected snapshots of weekends near the July 4th holiday to gain an understanding of
demand in Atlantic City during these weekends, gauging both arrival times as well as the number
of adults who are in the city during these periods of peak demand. Two of the most important
observations from these charts are:
 The visitation patterns are remarkably similar from year to year.
 The opening of the Borgata in July 2003 did not materially change either the
number of vehicles, or the arrival patterns.
3,500
Atlantic City Expressway vehicular traffic by hour, peak period
3,000
2,500
2,000
1,500
Saturday, Jul-7 2001 inbound
1,000
11 p.m.
10 p.m.
9 p.m.
8 p.m.
7 p.m.
6 p.m.
5 p.m.
4 p.m.
3 p.m.
2 p.m.
12 p.m.
11 a.m.
9 a.m.
10 a.m.
8 a.m.
7 a.m.
6 a.m.
5 a.m.
4 a.m.
2a.m.
3 a.m.
1 a.m.
12 a.m.
-
1 p.m.
Saturday, Jul-7 2001 outbound
500
Page 42 of 54
3,000
Atlantic City Expressway vehicular traffic by hour, peak period
2,500
2,000
1,500
Sunday, Jul-8 2001 inbound
Sunday, Jul-8 2001 outbound
1,000
11 p.m.
10 p.m.
9 p.m.
8 p.m.
7 p.m.
6 p.m.
5 p.m.
4 p.m.
3 p.m.
2 p.m.
1 p.m.
12 p.m.
11 a.m.
10 a.m.
9 a.m.
8 a.m.
7 a.m.
6 a.m.
5 a.m.
4 a.m.
2a.m.
1 a.m.
12 a.m.
-
3 a.m.
500
Atlantic City Expressway vehicular traffic by hour, peak period
4,000
3,500
3,000
2,500
2,000
1,500
Saturday, Jul-5 2003 inbound
1,000
3,500
11 p.m.
10 p.m.
9 p.m.
8 p.m.
7 p.m.
6 p.m.
5 p.m.
4 p.m.
3 p.m.
2 p.m.
12 p.m.
11 a.m.
10 a.m.
9 a.m.
8 a.m.
7 a.m.
6 a.m.
5 a.m.
4 a.m.
3 a.m.
2a.m.
1 a.m.
12 a.m.
-
1 p.m.
Saturday, Jul-5 2003 outbound
500
Atlantic City Expressway vehicular traffic by hour, peak period
3,000
2,500
2,000
1,500
Sunday, Jul-6 2003 inbound
Sunday, Jul-6 2003 outbound
1,000
11 p.m.
10 p.m.
9 p.m.
8 p.m.
7 p.m.
6 p.m.
5 p.m.
4 p.m.
3 p.m.
2 p.m.
1 p.m.
12 p.m.
11 a.m.
10 a.m.
9 a.m.
8 a.m.
7 a.m.
6 a.m.
5 a.m.
4 a.m.
2a.m.
3 a.m.
1 a.m.
-
12 a.m.
500
Page 43 of 54
4,000
Atlantic City Expressway vehicular traffic by hour, peak period
3,500
3,000
2,500
2,000
1,500
Saturday, Jul-2 2005 inbound
1,000
4,500
11 p.m.
10 p.m.
9 p.m.
8 p.m.
7 p.m.
6 p.m.
5 p.m.
4 p.m.
3 p.m.
2 p.m.
12 p.m.
11 a.m.
9 a.m.
10 a.m.
8 a.m.
7 a.m.
6 a.m.
5 a.m.
4 a.m.
2a.m.
3 a.m.
1 a.m.
12 a.m.
-
1 p.m.
Saturday, Jul-2 2005 outbound
500
Atlantic City Expressway vehicular traffic by hour, peak period
4,000
3,500
3,000
2,500
2,000
Sunday, Jul-3 2005 inbound
Sunday, Jul-3 2005 outbound
1,500
1,000
4,500
11 p.m.
10 p.m.
9 p.m.
8 p.m.
7 p.m.
6 p.m.
5 p.m.
4 p.m.
3 p.m.
2 p.m.
1 p.m.
12 p.m.
11 a.m.
10 a.m.
9 a.m.
8 a.m.
7 a.m.
6 a.m.
5 a.m.
4 a.m.
3 a.m.
1 a.m.
12 a.m.
-
2a.m.
500
Atlantic City Expressway vehicular traffic by hour, peak period
4,000
3,500
3,000
2,500
2,000
1,500
Saturday, Jul-5 2008 inbound
1,000
Saturday, Jul-5 2008 outbound
11 p.m.
10 p.m.
9 p.m.
8 p.m.
7 p.m.
6 p.m.
5 p.m.
4 p.m.
3 p.m.
2 p.m.
1 p.m.
12 p.m.
11 a.m.
9 a.m.
10 a.m.
8 a.m.
7 a.m.
6 a.m.
5 a.m.
4 a.m.
2a.m.
3 a.m.
1 a.m.
-
12 a.m.
500
Page 44 of 54
3,500
Atlantic City Expressway vehicular traffic by hour, peak period
3,000
2,500
2,000
1,500
Sunday, Jul-6 2008 inbound
Sunday, Jul-6 2008 outbound
1,000
11 p.m.
10 p.m.
9 p.m.
8 p.m.
7 p.m.
6 p.m.
5 p.m.
4 p.m.
3 p.m.
2 p.m.
1 p.m.
12 p.m.
11 a.m.
10 a.m.
9 a.m.
8 a.m.
7 a.m.
6 a.m.
5 a.m.
4 a.m.
2a.m.
3 a.m.
1 a.m.
-
12 a.m.
500
Despite such seemingly consistent patterns, however, significant changes in visitation
have occurred, most notably in the continued movement away from busing:
No. of annual bus passengers (in millions)
12
10
10.2
9.9
10.1
9.5
9.1
8.1
8
6
7.7
6.8
6.6
6.2
6.1
5.5
5.3
4
2
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008*
*12 months ending Jun-08
Source: South Jersey Transportation Authority
The continued decline in busing is likely to continue despite – and in some measure
because of – the increased competition for gaming customers from outside New Jersey.
Arguably, the bus customer – with the smallest gaming budget and a limited amount of available
time – is most likely to defect to more convenient destinations.
With that in mind, we then looked at the overall visitation patterns over time, juxtaposed
with gross gaming revenue (“win”) per visitor trip:
Page 45 of 54
$150
Total win per
visitor
Jan-08
May-07
Sep-06
Jan-06
May-05
Sep-04
Jan-04
May-03
Sep-02
$100
Jan-02
30,000,000
May-01
$110
Sep-00
31,000,000
Jan-00
$120
May-99
32,000,000
Sep-98
$130
Jan-98
33,000,000
May-97
$140
Sep-96
34,000,000
Jan-96
Total visitor trips
35,000,000
$160
A.C. visits vs. win per visitor
Total visitors
Win per visitor
36,000,000
Rolling 12-month periods
Here, we note that – over time – win per visitor and visitation tend to move in opposite
directions, which intuitively makes sense. The incremental visitors are less likely to be as
profitable as the existing visitors. However, the more recent period, noted at the far right of this
chart, shows that visitation has dropped more rapidly than the win per visitor.
That – along with the previous chart that shows non-gaming spending per visitor is
growing – demonstrates that the industry in Atlantic City can still attract high-quality visitors.
Page 46 of 54
Building destinations: Citywide impact
Growth in Atlantic City has not been limited to the Marina area, nor to other areas of the
city that have witnessed capital investment over the past decade. This section of the analysis
focuses on the area that is most closely situated near Bader Field: the Route 40/Exit 2 Cluster of
casinos, which are the Atlantic City Hilton and Tropicana. The cluster name refers to the closest
highway, Route 40 – also known as the Black Horse Pike – and the exit number off the Atlantic
City Expressway, which connects to Route 40 approximately two miles east of the Boardwalk.
That particular cluster is in a relatively quiet section of the Boardwalk. Indeed, there is no
commercial development on the Boardwalk beyond the Hilton. Management at these two
properties has long bemoaned the relative dearth of free walk-in business that other Boardwalk
casinos enjoy. Management at the properties have attempted to address this over the years by
adding more hotel rooms and retail (creating other marketing opportunities and attractions) as
well as by turning that relative solitude into a potential asset: Quiet can be a positive attribute.
The following chart tracks overall visitation to that cluster over the past 12 years, and
measures it also as a percentage of overall Atlantic City visitation:
7,000,000
20.0%
Route 40/Exit 2 Cluster: Visitation Trends
18.0%
6,000,000
16.0%
5,000,000
14.0%
12.0%
4,000,000
10.0%
3,000,000
8.0%
12 months
after Quarter
opening
2,000,000
12 months
after Borgata
opening
No. of visits
1,000,000
6.0%
4.0%
2.0%
% of overall Atlantic City visits
Jan-08
Apr-07
Jul-06
Oct-05
Jan-05
Apr-04
Jul-03
Oct-02
Jan-02
Apr-01
Jul-00
Oct-99
Jan-99
Apr-98
Jul-97
Oct-96
0.0%
Jan-96
-
As the chart shows, capital investment within the cluster – as well as elsewhere in the city
– has had a material effect on visitation patterns.
Additionally, however, we note that, during that period of examination, a garage at the
Tropicana that was under construction as part of The Quarter expansion collapsed, killing four
construction workers. The following chart looks at the Tropicana in isolation, looking at its
monthly share of both visitation and gross gaming revenue. Both the Borgata opening and the
garage collapse contributed to a decline in share, while the opening of the Quarter contributed to
an increase.
Page 47 of 54
Tropicana share of total
visitors
Tropicana share of gross
gaming revenue
16.0%
14.0%
Borgata
opening
12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
Quarter
opening
Garage
collapse
0.0%
Jan-97
Oct-97
Jul-98
Apr-99
Jan-00
Oct-00
Jul-01
Apr-02
Jan-03
Oct-03
Jul-04
Apr-05
Jan-06
We then examined trends in gross gaming revenue per visitor trip for that cluster,
juxtaposed to GGR per visitor trip industrywide:
$160
GGR per visitor trip
$150
$140
$130
$120
Route 40/Exit 2
cluster
Industrywide
$110
$100
Jul-07
Jan-08
Jul-06
Jan-07
Jul-05
Jan-06
Jul-04
Jan-05
Jan-04
Jul-03
Jul-02
Jan-03
Jan-02
Jul-01
Jul-00
Jan-01
Jul-99
Jan-00
Jul-98
Jan-99
Jul-97
Jan-98
Jan-97
Jul-96
$80
Jan-96
$90
Rolling 12-month periods
Numerous factors can account for the divergent paths in the above chart. This would be
particularly true when two properties in that cluster were not pursuing identical marketing
strategies.
Page 48 of 54
For example, when Aztar Corp. owned the Tropicana, it pursued a strategy – beginning in
the late 1990s – to target cash-paying hotel guests in various segments, in part to take advantage
of its position as the largest hotel in Atlantic City.
Still, we can point to some over-arching reasons for the fact that, pre-Borgata, the cluster
tended to have a larger win per visitor trip than the overall industry: This was based on relative
isolation, and a focus on overnight visitation, which encourages longer stays and, consequently,
more revenue per visit.
The shift, beginning in late 2004, toward a lower win per visitor trip for this cluster can
be attributed, almost entirely, to the opening of the Quarter in 2004, which prompted significant
increases in visitation but not necessarily increases in casino patronage by these visitors; many
came just for shopping and dining.
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Atlantic City: Improving Its Image
Spectrum believes that one of Atlantic City’s principal weaknesses is an image problem
that can trace its roots to the city’s perception as a rundown urban center, followed by its image
as a casino destination that catered mostly to older slot players who often arrived by bus. Such
impressions, which we suggest are simplistic yet widely held, have improved. Yet such
impressions still exist, and that essentially means that a weakness – a poor image – fuels an
opportunity: Adults who have not experienced Atlantic City represent future market growth.
Notably, when Borgata opened in 2003, its then-CEO Robert Boughner stated numerous
times in public interviews that the property was targeting what he termed the “Atlantic City
rejecter,” adults who had elected not to visit the resort because of its perceived image.
As a result of targeting a different demographic – effectively a combination of younger
and more affluent adults – Borgata was able to grow the market appreciably, as noted earlier.
The 2008 Visitor Profile Study, prepared by Spectrum for the ACCVA, demonstrates that
the strategy developed by Boughner and the Borgata has serious potential to continue growing
the market. The following is excerpted from that report:16
“Households where the income is greater than $150,000 account for 4
percent of the U.S. population, but they account for 11 percent of consumer
spending.17 As of last year, households with income greater than $150,000 spent
$7,500 annually on entertainment, more than five times the level of spending on
entertainment by households earning $70,000 or less. According to Ypartnership,
the number of Americans with a net worth of more than $1 million is now 9
million, up from 6 million three years ago. That represents a 50 percent increase
in the number of adults who have reached that important benchmark of affluence.
Indeed, Ypartnership (an Orlando-based marketing company that conducts
various consumer surveys) notes that there are more millionaires in the United
States than there are unemployed adults.
“The number and proportion of affluent adults is expected to increase
significantly. By 2010, more than a quarter of U.S. households will be earning
more than $100,000 annually.
“In Atlantic City, here is a breakdown of visitor representation by income:
Income Level Atlantic City
Visitor
Profile 2008
weighted
< $20K
3%
$20-$29K
9%
$30-$39K
15%
$40-$49K
13%
16
17
Gaming
customers
General
Tourist
Conv.
Attendee
Event
Attendee
Retail
customers
Package
Purchaser
2%
7%
13%
13%
3%
7%
9%
8%
1%
5%
6%
9%
3%
6%
10%
14%
6%
3%
10%
5%
1%
2%
7%
10%
Atlantic City Visitor Profile Study 2008, Spectrum Gaming Group, p. 170
U.S. Bureau of Labor Statistics
Page 50 of 54
Income Level Atlantic City
Visitor
Profile 2008
weighted
$50-$59K
13%
$60-$69K
9%
$70-$79K
12%
$80-$89K
4%
$90-$99K
4%
$100K 7%
$149K
Over $150K
7%
unknown
5%
Gaming
customers
General
Tourist
Conv.
Attendee
Event
Attendee
Retail
customers
Package
Purchaser
13%
10%
13%
4%
4%
8%
11%
11%
13%
5%
4%
12%
12%
12%
12%
7%
7%
11%
8%
12%
13%
6%
6%
9%
16%
9%
13%
0%
9%
2%
15%
17%
13%
5%
5%
11%
8%
5%
10%
7%
10%
8%
7%
7%
9%
18%
9%
5%
“This clearly shows that Atlantic City is making some inroads into the
wealthier income brackets. The most attractive income segments found in the
Visitor Profile Study include general tourists, convention visitors, and those
visitors who are trending toward more frequent visitation.
Income Level
Atlantic City
Visitor Profile
2008
weighted
Gaming
customers
General
Tourist
Conv.
Attendee
Event
Attendee
Come More
Often
Package
Purchaser
< $90K
> $100K
unknown
81%
14%
5%
79%
16%
5%
71%
21%
8%
71%
21%
8%
77%
16%
7%
76%
19%
5%
75%
20%
5%
“If the marketing strategy espoused by the ACCVA and others, such as
Borgata, continues to be implemented, it should pay dividends in the form of
attracting greater numbers of adults with higher levels of disposable income.
Consider the following chart, which shows data that Borgata supplied to us
approximately one year after its opening in July 2003. We have compared the
demographics that Borgata was able to glean from its database, with our
demographic breakdown of the same age group:
Ages
21-24
25-39
40-54
55-62
63-73
over 74
unknown
Borgata Atlantic City Atlantic City
visitor base
Visitor
2004 Profile 2008
5%
20%
25%
17%
16%
8%
9%
3%
12%
20%
25%
23%
9%
8%
3%
17%
28%
20%
19%
12%
1%
Gaming
customers
General
Tourist
Conv.
Attendee
Retail
customers
3%
14%
30%
23%
21%
11%
1%
5%
19%
42%
17%
13%
4%
0%
8%
31%
42%
14%
4%
1%
0%
9%
31%
31%
16%
12%
0%
0%
“This table indicates that more upscale and diverse capital investments –
accompanied by comprehensive marketing strategies – will allow Atlantic City to
yield the following:
Page 51 of 54

Attract younger adults

Attract a broader variety of adults who seek various entertainment
experiences

Attract wealthier adults
“We also suggest that this trend holds the potential to feed on itself, in that
more adults who report a positive experience in Atlantic City will engender even
more visits from an expanding customer base, which would also encourage
greater capital investment in Atlantic City.
“This part of the analysis suggests that Atlantic City should cement its
position as the capital of East Coast gaming. We note that none of the states in the
Mid-Atlantic region that has approved – or is likely to approve – casinos is
following the Atlantic City model, which is characterized by a low tax rate and a
concentration of capital in one location. The low tax rate offers an advantage over
other markets in that more capital would be freed up for non-gaming investments.
Essentially, by becoming the capital of regional gaming, Atlantic City would open
itself up to more non-gaming spending by adults throughout the region.”
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Conclusion
Spectrum has the distinct advantage of a 30-year perspective on Atlantic City, and during
much of that time we have observed its progress (or lack thereof) and we have enjoyed an
ongoing dialogue with a variety of securities analysts and investors.
From the standpoint of the investment community, we suggest certain factors need to be
considered when attempting to project Atlantic City’s future in light of its past.




For most of the time since the first casino opened in 1978, Atlantic City has had
the benefit of a monopoly, and its business model reflected that reality. Operators
did not have to invest in destination resorts because they already had a captive
audience: the gaming-centric customers who had no option if they wanted to
gamble. That monopoly has largely eroded.
Atlantic City has begun an evolution, spurred largely by the opening of the
Borgata in 2003, not despite losing its monopoly, but rather because it lost that
monopoly. The business model simply had to evolve.
Nevada lost its monopoly as the only state that offered casinos as far back as
1978, and since then, it has used its casino industry as a lever to build a new
business model that offers a variety of amenities, in which gambling is the central
engine – but not the only engine. Atlantic City can emulate that model with more
destination resorts.
The new model – as has been demonstrated by a variety of large-scale properties
in Las Vegas and by the Borgata in Atlantic City – can generate greater levels of
profitability, even though the capital requirements are much greater now.
Page 53 of 54
About this report
This report was prepared by Spectrum Gaming Group, an independent research and
professional services firm founded in 1993 that serves private- and public-sector clients
worldwide. Our principals have backgrounds in gaming operations, economic analysis, law
enforcement, due diligence, gaming regulation, compliance and journalism.
Spectrum holds no beneficial interest in any casino operating companies or gaming
equipment manufacturers or suppliers. We employ only senior-level executives and associates
who have earned reputations for honesty, integrity and the highest standards of professional
conduct. Our work is never influenced by the interests of past or potentially future clients.
Each Spectrum project is customized to our client’s specific requirements and developed
from the ground up. Our findings, conclusions and recommendations are based solely on our
research, analysis and experience. Our mandate is not to tell clients what they want to hear; we
tell them what they need to know. We will not accept, and have never accepted, engagements
that seek a preferred result.
Among our most recent private-sector clients are the Casino Association of New Jersey,
Elad Properties, Harrah’s Entertainment, Morgan Stanley, Pokagon Band of Potawatomi Indians,
and the Seneca Nation of Indians. Recent public-sector clients include Broward County (FL),
West Virginia Lottery Commission, the New Jersey Casino Reinvestment Development
Authority, the Atlantic City Convention and Visitors Authority, Connecticut Division of Special
Revenue, Office of Massachusetts governor, the Singapore Ministry of Home Affairs, Rostov
Oblast (Russia), and the Puerto Rico Tourism Company.
We maintain a network of leading experts in all disciplines relating to the gaming
industry, and we do this through our offices in Atlantic City, Bangkok, Guangzhou, Harrisburg,
Hong Kong, Las Vegas, Macau, Manila and Tokyo.
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